Two Deals Extend the Financial Frontiers of Gene Therapy

By LAWRENCE M. FISHER

Published: January 14, 1997

A consolidation of the nascent gene-therapy industry advanced yesterday with two deals.

Novartis A.G. of Switzerland, formed by the merger last year of Sandoz and Ciba-Ceigy, said it would buy the 26.8 percent it did not already own of Systemix Inc. for $75.8 million, or $19.50 a share.

And Cell Genesys Inc. said it would acquire the Somatix Therapy Corporation in a stock swap valued around $80 million.

Although gene therapies have yet to produce any products or profit, and may not for a decade, the potential power of the technology makes it a strategic asset for any major pharmaceutical or biotechnology company. The revolutionary concept of using the body's own genetic material as a drug has vast potential to correct genetic defects and, in theory at least, treat almost every known disease.

The shares of Systemix rose $4, or 26 percent, to $19.3125, in Nasdaq trading yesterday. Shares in Cell Genesys closed at $8.8125, down 31.25 cents, while those of Somatix closed at $3.1875, down 62.5 cents.

Analysts said the deals announced yesterday could focus attention on Vical Inc., Gene Medicine Inc. and Targeted Genetics Inc., the three most prominent remaining independent gene-therapy companies, although none of the three registered any significant gain yesterday.

''Gene therapy is going to take longer to be profitable than the euphoria of the last couple of years might have suggested,'' said Viren Mehta, an analyst with Mehta & Isaly, foreseeing the likelihood of more mergers with deep-pocket partners.

Novartis has emerged as a gene-therapy powerhouse. Sandoz originally purchased a 60 percent stake in Systemix in 1991 for $391.8 million, or about $65 a share. In October, Systemix rejected an offer of $17 a share from Novartis, Sandoz's successor, as inadequate. Systemix has done pioneering work in isolating stem cells, but the share price of the company has declined over the years as it failed to produce drugs.

In addition to its stake in Systemix, Sandoz had already acquired Genetic Therapy Inc. of Gaithersburg, Md. Ciba-Geigy, through its 49 percent stake in the Chiron Corporation, gained access to technology developed at Viagene, which Chiron acquired in 1995, and Progenitor, a privately held company.

Indeed, the Federal Trade Commission, estimating that the market for gene therapy could reach $45 billion by 2010, required Ciba and Sandoz to share two dozen essential gene-therapy patents with Rhone-Poulenc Rorer, a major competitor, before approving the merger. The commission's action was unprecedented in a field with no existing sales, but officials said they wanted to insure competition in gene therapy.

''We will now have complete access to some very interesting enabling technology, which we wanted to have control of,'' Daniel Vasella, Novartis's president, said in a telephone interview. ''It's a good end to the long Sandoz-Systemix history. From our perspective, once we see something of strategic value, it doesn't make sense to half-own it.''

Like Systemix, Somatix has been known as a company with leading-edge scientists but which has had trouble turning research into real results. Unlike Systemix, which had been able to draw on Sandoz's financial resources, Somatix has lived from one stock offering to another, often flirting with bankruptcy, and has been quietly for sale for some time, analysts said. For Cell Genesys, with ample cash and strong management, Somatix's strong science and patents make it attractive.

''There is tremendous value in the science and in the gene-delivery technology and intellectual property that go with it,'' Stephen A. Sherwin, the chairman and chief executive of Cell Genesys, said in a telephone interview. ''The way companies at our stage create value is to put technology and patents together, and to enlist corporate partners,'' he said, noting his company's partnership with Hoechst Marion Roussel in the development of a gene-therapy treatment for AIDS.

And Elizabeth Silverman, an analyst with Punk Ziegel & Knoell, said: ''Somatix, among all the gene-therapy companies, probably had the most substantial technology assets, but was able to accomplish the least with them. Cell Genesys has a lot of money and has handled it very carefully. This is one of those ideal combinations that are so rare in biotech.''